The Canadian RRSP Home Buyers’ Plan enables residents to use their Registered Retirement Savings Plan (RRSP) to fund a portion of their down payment. The Home Buyers’ Plan (HBP) was created by the federal government for first-time home buyers – it allows them to take a maximum of $25,000 out of their RRSP and use it as a tax-free down payment on their first home.
As a bonus, if you’re buying the home with another first-time homebuyer, both people are allowed to take $25,000 from their RRSPs for a $50,000 combined total. There is one small drawback though, which is the loan needs to be paid back in 15 years time.
Eligibility for a HBP
To be eligible for the HBP you need to be a Canadian resident who is buying a home for the first time and meet a few other requirements. You need to access the RRSP funds and have them in your bank account at least 90 days before you withdraw the money. Although the rules state you must be a first-time homebuyer, you will be considered one as long as you haven’t owned a house anytime in the previous four years. If the home is being bought with a common-law partner or spouse, and they have previously owned a home, you must not have lived in a house which they owned for the previous four years. Therefore, you can actually use a HBP more than once.
In addition, you must have a written agreement in place to build or purchase a qualifying home and move into it as a primary residence within a year of buying it. If you’ve already used a HBP before it must be paid off entirely. If you take money out of an RRSP and don’t meet the eligibility requirements for a HBP the RRSP withdrawal is subject to tax and must be included as taxable income on your income tax return.
How to Apply
To be eligible for the plan you need to apply for a T1036 Form from www.cra-arc.gc.ca, which is the website of the Canada Revenue Agency. Section one needs to be filled in and then given to the institution which handles the RRSP. That business will then fill in the remainder of the form and also send you a T4RSP form to confirm the amount of the RRSP withdrawal for the HBP. This must be included in your tax return the same year. The RRSP withdrawal can’t be made any later than 30 days after you’ve taken title of the home or it won’t be eligible for the plan and it will be taxed.
Two years after buying the home you’ll be expected to start repaying the money to your RRSP on an annual basis. However, you have 15 years in total to do this. A notice of assessment will be sent to you from the Canada Revenue Agency which will let you know how much has been repaid and how much is still owing. It also lets you know how much the next payment needs to be. Payments need to be made in the year they’re due or no later than the first 60 days of the next year.
For example, if you borrowed $20,000 from your RRSP in 2015 the first payment due will be in 2017. To calculate the minimum payment you just need to divide the $20,000 by 15. You can pay more than the minimum if you like and this will result in adjusted minimum annual payments for the remainder of the 15 years. Therefore if you pay $5,000 in the first year, the remaining $15,000 owing will be divided by the next 14 years for a new minimum payment.
Missing a Payment
If you happen to miss an RRSP repayment one year you need to record the amount of the missed minimum payment on your tax return as income. This amount will then be taxed, but the balance on the HBP will be reduced. The same formula is used if you make a payment, but it’s below the minimum. For example, you pay $1,000, but the minimum payment is $1,500.
A HBP is an ideal way for first-time homebuyers to save themselves a considerable amount of money when making a down payment since it’s tax free. Contact MortgageMeister.com today for help in obtaining a HBP mortgage or for assistance on any other mortgage-related matters.